Black Hills Corp (BKH) 2002 Q4 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to the Black Hills Corporation Quarterly Earnings teleconference. At this time all participants are in a listen only mode. Later we will have a question and answer session. I'll give you instructions at that time. Should you require assistance while you're on this call, simply press '0' then 'star' and an operator will come onto your line to assist you. As a reminder this conference is being recorded for digitized replay. If you wish for the replay information, please stay on the line at the conclusion of the call. I will now turn the conference over to the Director of Investor Relations, Mr. Dale Jahr. Please go ahead sir.

Thank you Kim. On behalf of Black Hills, welcome to our conference call. I'll remind the audience that conference call may include forward-looking statements as defined by the SEC. These statements concern our plans, expectations and objectives for future operations. Such statements are based on what we believe are reasonable assumptions and Based on current expectations of industry and economic conditions and other factors. However, risks and uncertainties could cause results to differ materially from those in forward-looking statements. I refer you to the cost sharing language published in our press release and other public disclosures.

Our discussion of recent results will be led by Mr. Mark Thies, our CFO. Mark has a few opening remarks for us and then we'll open it up for questions.

Thank you Dale. Good morning everybody. We had another very good year at Black Hills Corporation. We had earnings of $2.26 per share. From continuing operations we had earnings of $2.33 per share. In the Q4 our earnings were $0.59 which is above where we had $0.18 of earnings in the Q4 but $0.28 of charges in that quarter. If you add those back we had $0.46. We had a [28%] increase in earnings in the Q4.

We had a number of significant accomplishments as we continued our strategy in the year 2002. We have now almost 1000 megawatts of non-regulated generation. Nearly 500 megawatts of utility capacity, which increased over 365 megawatts in 2002.

We had record production from our other energy businesses as well as our coal production increase 15% to over 4m tons. We had our fifth consecutive record of production in oil and gas unit. Our reserves are record of nearly 60 BTL.

We continued to grow our communications company, adding approximately 7,000 customers in the year to nearly 25,000 customers.

As we look forward, our construction projects are nearly done. Our [indecipherable] plant is in testing and is expected to be operational very soon. Right at the end of the year, the first week of January '03, we brought on line the Las Vegas plant. Our capital requirements going forward have significantly reduced as our construction projects have wound down.

Our liquidity at the end of the year we had $64m available under our credit facilities. We had $80m of cash of which approximately $50m is restricted by debt agreement. We look forward to continuing our growth at Black Hills. We believe that with the market our strategy of having long-term contracts on our power generation. Over 90% of our power generation is under contract. That will serve us well to increase cash flows and earnings as we go forward.

I would now like to open it up for questions.

Ladies and gentlemen if you wish to ask a question please press the '1' on your touchtone phone. You will hear a tone then indicating you've been placed in queue. You can remove yourself from the queue at any time by depressing the 'pound' key. If you're using a speakerphone, for the sake of sound clarity, please pick up your handset before you ask your question. Okay our first question is coming from the line of William Hyler at CIBC, please go ahead.

Good morning everybody.

Good morning Bill.

Just a couple of quick questions. I did notice you continued, Mark, to have some strong off-system sales. I think you mentioned up 51% for the quarter. It looks like prices are up a little bit there. It looks like it was a key driver. I assume that was a stronger - what drove the volume growth off-system?

To get availability we did have a slight reduction in load. In our utility we did add a turbine in the year to Black Hill Powers fleet. We have an ability to move power as you know both east and west. We are able to run those generators as well at our plants at high levels of capacity and sell our power off-system.

Okay. Now the completion of the east/west connection, is this still scheduled for the March quarter?

No. The east/west connection is in the fall.

I'm sorry, that's what I meant, later this year. That will allow you to move more megawatts to the [map] region. Correct?

Well it will go both ways Bill. As we'll be able to buy or sell power from the eastern market yes. From the eastern grid.

Okay. Mark, you mentioned your CAP spending is going to be [ratcheting] down from the high levels we've seen in recent years. Do you have a budget for us or could you at least give us an idea of what maintenance capital spending looks like for '03.

Historically it's easier to go down by the business units. The CAP spending one I said that our CAP spending is expected to decline, it's really the construction projects. The major capital projects are coming to completion. Historical capital spending for the utility has been in the $15m - $20m range. Which is really maintenance capital to provide a reliable electric system. That's been our historical, we'd expect that to continue.

The communications business is expected, you know, has completed its base infrastructure. So really the capital with respect to that is expected to decline to the, you know, to the $3m - $5m range on an annual basis. Which is really just adding additional customers as our major project there is completed.

With respect to the integrated energy businesses. Generally with the power generation, those are all largely new machines so that's generally in the $5m - $10m range for all of that from a maintenance capital perspective.

Oil and gas. We've historically spent $20m - $25m in our drilling. As we look forward with the pending acquisition of Mallon Resources we would expect that to increase as we prove up those reserves. That will really [indecipherable] so we generally get $50m - $75m of maintenance capital. That includes drilling for oil and gas.

I would hope that amount would hopefully include some growth in the EMT.

Absolutely.

Okay.

Thank you.

The next question comes from the line of Henry Falfour (ph.) at Benjamin Partners. Go ahead.

Mark congratulations.

Thank you.

I think a lot of focus in people's mind in on how much free cash flow the business is going to have. Will you have to access capital markets to continue to expand or can you do it from your free cash flow and/or debt?

Historically we've had very strong cash flow as we bring our power generation plants on line. We just brought on line, again the Las Vegas plant. We expect to bring on line Wygen (ph.) coal plant very soon. So we expect our cash flow to be increased. We've had, you know, $140m - $170m in cash flow from operations and as I just mentioned, $50m - $75m of capital requirements for ongoing maintenance capital including some drilling capital.

We would expect that we have an ability to grow some internally. It really depends on the size of the project as to how we would have to finance that project. We do have an ability through our own internal generation of cash to grow, you know, grow a certain amount. We would not continue to add debt as our leverage is similar to where we were at the end of the third quarter. So we would expect to grow internally through our cash flows.

Thanks.

Our next question comes from the line of James Bellessa at B.A. Davidson & Company. Go ahead.

Good morning. In your press release you talk about your increase in gas and oil reserves. Then there is a clause here that I'm not understanding fully. "Primarily due to our continued growth average", which I understand. Then the next clause "and the effect of higher prices at year end 2002". How do higher prices affect how much gas and oil you have in the ground?

When you do your reserve analysis, I'm not a reserve engineer but when you do your reserve analysis you look at the future revenues with respect to our future prices and then how much the cost is to pull that gas from the ground. So at the higher price levels you have more gas that is commercial. In certain wells they'd have lower price levels.

When you see prices turn around and are very low, you see operators shutting in wells and not having available reserves. So the higher price does incrementally improve the recoverability of gas. You'll notice in the footnote to our table under our production. The prices were $4.60 for '02 at the end of the year and $2.57 at the end of the year of '01.

So there is more gas in the ground than is commercially recoverable at that higher price.

In your outlook you do not describe anything about the earnings outlook per share for the coming year. Are you still holding to the 8% - 10% growth rate that you previously expressed.

On a long-term basis we've said in previous releases. We've said in previous releases on a long-term basis we would expect to grow remains at 8% - 10%, we had no change from that in this release.

Thank you very much.

Next we go to the line of Neil Stein (ph.) at John Levin & Company (ph.). Go ahead.

Hi Mark. Thanks for having the call.

Good morning Neil.

Good morning. I just had a couple of questions. First, with respect, I don't think you addressed the rating agencies, I believe Moodys downgraded [you] at the lowest investment grade levels. I don't know if you have any reaction to that. Do you want to enhance that rating? Might you need to issue equity to do it? That would be my first question.

Yes we did have in December the rating agencies, Moodys specifically, downgraded us three notches to be BAA3 and continued a negative outlook. We've had a lot of discussions with the rating agencies. Their primary driver is if you continue to deploy capital and grow, because historically we've deployed significant capital. That we would have the ability to continue to do that via debt.

We are committed to have solid investment [grade] ratings for our company. We believe we can do that by again, because the capital that we have to deploy is discretionary. We can just use our cash flows to pay down debt or look at other alternatives, depending on if we have projects that we have, that we want to do to continue our growth.

So the current plan is just to keep spending in check and reduce debt through internal generation.

We look at opportunities. We do have a -- we have filed a shelf registration to allow us to have opportunities to access the capital markets. But at this point, you know, we are evaluating all of our opportunities. That can include just maintaining cash because our construction program has wound down significantly.

So that seems, you might decide to issue equity, you just don't know yet?

We could.

Okay. I guess the second question on, as far as your credit lines are concerned. I don't know if you could go over the schedule when these expire over the course of 2003. How much is currently drawn on your credit lines? You gave availability.

Yes. We have $445m of short-term credit lines. There is a $50m credit line that expires in May, late May, the 26th I believe of May. Then our revolving credit facility at $195m of our revolving credit facility comes due in late August, again the 26th or 25th August. Those are the two areas, the two retirements, not retirements but, terms for our '03 financings. Our longer-term financings, the first one that we have to expire is set for '06.

Right.

So they're short-term financings. We were successful in renewing our facility in August of last year. Despite the market conditions we renewed $195m out of $200m that came to in August of 2002. We would expect to, you know, continue working with our bank group on those facilities.

The $50m is just a bridge loan and the $195m facility, how much is drawn on that?

Well again, we have $64m available. So $135m or $130m.

Is drawn. Okay.

We also have again $30m cash. $80m of which, approximately $50 is restricted.

For the bridge loan in May. I mean, what would be your plan or strategy for taking that out. It doesn't seem like, you know, you have really sufficient liquidity on hand to deal with that in the absence of the banks rolling it over.

Well we're looking to term out some of our short-term debt because again we have a number of long-term assets that really just came on line in the construction project. We would look to term out some of our debt either through a longer-term agreement with the banks or through capital markets activity under a shelf when that's available. We would expect to issue some longer-term debt that would then improve the liquidity and pay down the short-term borrowings.

Okay. Then my last question. Do you have any sense on what type of pricing you're seeing from office and sales during the first quarter?

Well the market in the west, you know, has been in the high thirties to mid-forties. When you look at, like the mid-Columbia, mid-Columbia is a point that we generally try to price off of in the west and that has been just again it is through January, you know, the upper thirties to lower forties on average and that is somewhat day by day, it depends, but that's probably the average we've seen.

Thank you.

Thanks Neil.

Next we go to the line of Michael Garvey at Angelo Gordon. Go ahead.

My questions were answered, thank you.

Then we go to Paul Patterson at Glenrock Associates.

Hi. I just want to ask you about the potential of ‘02, ‘03 going forward? You mentioned about it in the 10-Q. I was wondering if you were able to quantify it at this point in time.

The accounting the requirements with respect to revenues?

Well not with respect to revenues but respect to derivatives and market accounting and the decision of 98-10. What kind of charge you might see and whether or not their might be a benefit to accrual income, going forward.

We are currently evaluating the impacts of that change. We are under since 98-10 was gone, we do account for our activities under the new pronouncements of BAS-133. Generally our business in our marketing entity is moving gas back to back. We don't take significant positions, or have taken significant price risks. We try to move our gas back to back. So the impact on volatility is lessened. We do expect to have an impact with respect to ‘02, ‘03, but because also the book that we have is a relatively short book, that as that wound off in the year 2003, we would expect that impact not to be significant, but we are evaluating that this time and we will disclose that in the 10-K.

Okay, great. Thanks a lot.

If there are any further questions, now is the time to press '1'. Next we go to the line of Michael Worms of GKM. Please go ahead.

Thank you. Good morning, Mark.

Good morning, Mike.

A couple of questions. Can you talk a little bit about the hydro conditions up in Pacific North-West and how that might impact the company during the summer time? I understand that they are pretty weak and that were expecting perhaps even the situation to perhaps become like one we had back in the 2000 early 2001 time frame. I know the economy is weaker and we have had some Federal intervention, but can you talk just a little bit about that?

The hydro obviously is a big impact to the North-West and they are half way through their winter and they need to get some significant snowfall or strong spring rains to fill up the reservoirs. If they don't, that could put some pressure on the markets out there and would increase prices. We would expect them to increase prices, if that occurred.

Because we have again access to that market, we view that as beneficial to Black Hills on the off systems sales side and we would be able to move our power to those markets. But we don't plan for that specifically. We look at normalized year and normalized power prices. But we do have - again we have added some generation to our utility, 40 megawatts and we have access to the West market, so we would expect to be able to take advantage of that situation, should it occur.

Great. Can you talk a little bit about the Las Vegas plant? How has it been running since it came up. Has Alleghany been taking power from that plant? Can you just give us a bit of an update on that?

The plant went commercial January 3. Met all its tests in December and began delivering power under the contracts and we have been delivering power under that contract and we expect to [bill] the January results this week, if it hasn't already gone out and they've continued to take power. It is not necessarily just power as it is a capacity payment, so we would bill them regardless of whether they took power.

Okay. Can you just explain to us - in the release it says that sales were down on Q4 but that was a function of Homestake Mining. Can you just normalize that for us where sales have been.

Well, Homestake Mine was a goldmine that was a significant industrial customer, but we had been planning on that for several years and they produced their lode for a number of years and we were expecting the mine to close. So when it did occur, we had planned for that already from our utility side. We did have strong results with respect to increased sales from residential and commercial customers. The drop in industrial sales is due to Homestake. That was an expected event for us and we continued to run our utility with the normal expectation of growth. This was more of a reset year because of the Homestake Mine. We had Homestake throughout 2001 and did not have them at all in 2002, as they closed down in late December of 2001. So to show just a slight decline in overall sales is a testament to the other growth in our service territory.

Going to back to a question I was asked earlier about off-system sales being so strong in Q4, I understand your side of it but what as driving those off-system sales in the market place itself? Were there power plants down? What was actually driving your ability to sell power off-system?

Our ability is low-cost facility.

I understand that part, Mark. What was driving it on the other side? Where was the demand coming from? Why were off-system sales stronger in Q4 of this year versus Q4 of last year?

To some extent it was significantly colder in October and in November. October primarily, somewhat November and then December, I am not exactly sure of all the weather patterns. I don't know all of the details of what's driving all the other markets, Mike, but we look at the daily prices or the monthly prices and if our generation is below that and we can access those markets, we sell our power. We had that ability throughout 2002. We did add another turbine, again recall, in 2002 that increased our capacity to 40 megawatts.

Thank you very much and congratulations on a good year.

Thank you.

our next question comes from Neil Stein, John Levin and Company. Go ahead.

My follow up was answered, thank you.

Thanks, Neil.

Now we go to Matt Bryder at Millenium Partners. Go ahead.

Hello. Two questions.

First is I was just wondering if Shelf is currently active.

The Shelf was declared effective this week.

The second question is, could you guys give us an update on pension expenses and if you have made adjustments to the return assumptions and the discount rate assumptions.

We disclosed all that in our third quarter 10-Q.

Has it changed since then?

No and that is our year for our pension is driven off of September 30 when we do our valuation, so that is the current information which was in our third quarter 10-Q.

Thank you.

Next we go to Paul Debeth (ph.) at Valueline.

What was your off balance sheet financing at year end?

The only item of off balance sheet financing again is the Wygen plant. It is a synthetic lease and it is no different than what was disclosed in the third quarter 10-Q.

Thank you.

And right now there are no further questions in the queue. We can pause a second or two here, to see if anyone else queues us. We are not having anyone queuing up. It does appear that there are no further questions.

Thank you everyone, we appreciate your time.

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